New Regulation for Marijuana Shares Awaits

Jana Partners LLC, an activist investment company, is interested in backing a sale of an ounce of marijuana in the form of a cash payment rather than share-swap deals that buy the product in the form of an asset-backed debt note.

Jana has told securities regulators it has started the process for a second round of stock buybacks in order to better evaluate the financial metrics used to value the assets of marijuana companies.

This week, the company said it plans to announce a comprehensive plan for the asset sales by the end of May or early June.

Leasing the Model

In the past, one way companies such as Modelo grew their marijuana offerings was through a sale-leaseback. Yet during the expansion of cannabis from medical use, ownership spread to other marijuana businesses. To the extent that did not create any fund for financial health, investment companies instead took the space-buying opportunity and found an asset-backed debt facility that made for convenient payment alternatives.

New rules imposed by the Securities and Exchange Commission in July are changing the valuation for both. Under rules that went into effect in October, asset-backed agreements must be used to value the holdings of a marijuana company.

In January, the agency began to require the marijuana company to submit publicly available financials showing a $100 investment. The qualifying assets include all cannabis stock, as well as actual cannabis plant inventories, as well as the potential in-house developed property.

Share-Swapping (How Investors Play)

Because of the asset-backed debt facility, analysts say there is a much larger opportunity to distribute shares instead of borrowing.

“[There is] a substantial amount of equity available, but there is always that luxury of waiting until it is fully deployed,” said Jared Boucher, senior managing director of investment bank GreenLabs.

Consequently, Boucher suggests that a company that is using the model would seek to buy back shares with a proven funding mechanism or a private exchange.

Insiders Consider Stock Ownership A Risk

For Jana, the dynamics of marijuana stock-ownership look more like a pilot program than a business model.

“You’re going to have to look at it from multiple perspectives,” said Boucher.

Valuing marijuana assets with an investor-equity proposal typically requires some exclusivity agreement, such as a promise from the seller to buy shares, or licensing rights, and marijuana ownership in case of a legal change. Even in an asset-backed financing program, though, buying into the business for asset-backed debt is one way to ensure the volume has to earn access to the lending pool.

Jana is hoping to track the health of the company’s cash flows and to understand the magnitude of the debt market and the value its offering.

Marketing an entire share of the company is a risk.

“If you’re trying to get people in an acquisition, you’re going to see things that make people uncomfortable,” said Robert O’Brien, partner of law firm Dentons.

Added Ben Rattay, chief investment officer of Canadian cannabis dealmakers, SVB Buying: “We are not just saying we are going to take your options that you don’t have, but we are going to take your equity as well. So it has to match up in terms of the calculation.”

There is also the issue of competing competing offerings from a range of investors in a sector that is largely unregulated.

“Cannabis is a very capital-intensive business to start up,” said Rouleau. “You don’t have a lot of institutions, which can be highly priced, that are the sources of capital. All those other sources require a subscription fee, which comes in the form of shares, stock option, or at some point a public offering.”

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